June 30, 2012

As a young twenty something ingenue at JP Morgan Chase, Blythe Masters was the inventor of the Credit Default Swap (CDS), the financial instrument responsible for almost destroying the global financial system in 2008. Warren Buffett called CDSs and other derivatives "financial weapons of mass destruction." But exactly what are CDSs and how did they function to almost bring down the entire global banking system? CDSs came about from JP Morgan Chase, Goldman Sachs and other large banks' desire to offload risk and thereby strengthen their balance sheets. They would then be in a position to do more deals due to the fact that they would not have to keep so much collateral on their books to back up their deals. If a loan or bet went south, someone else would be responsible for paying off on the insurance policy, not them. Thus they could increase their profits by doing more and more trades without having to worry about paying off on any of them if anything went awry. That would be some other institution's responsibility. A CDS was an insurance policy. Furthermore, you wouldn't even have to be directly involved as a party or counterparty. You could purchase a "naked" CDS. This is like betting on a horse that you don't own and have no financial stake in or responsibility for.

When the big banks entered the subprime loan market, their problem was "how do we get the rating agencies such as Moody's and Standard and Poor's to rate these securities as anything other than trash and make them more attractive to investors?" First, the subprime loans were bundled together and securitized creating Collateralized Debt Obligations (CDOs). Then they were sold off in tranches (slices) to investors. Blythe Masters' invention circa 1996 enabled them to be rated AAA. How they did it was this. The rating agencies might want to have rated the CDOs BBB or CCC, but the banks said to them "How about if we throw in some insurance that these mortgages won't default? Will that raise the credit rating of this worthless junk?" Sure enough the rating agencies said. So part of the package became a CDS which effectively guaranteed the CDO and got it rated AAA. Investors ate up the product never bothering to look at the underlying worthless mortgages. A AAA rating was good enough for them. After all how could they go wrong with a AAA rated investment product? Then as soon as the deal was done, JP Morgan Chase traded off the CDS to someone else like AIG, for instance. No regulator or anyone else ever bothered to ask if AIG had the assets to back up the risk it had taken on and JP Morgan was free to go on and make other trades and deals since the need to back up any of these deals had just been transferred to some other institution. Without a lot of risk weighing down their balance sheets the big banks were free to make more deals, more trades and higher profits.

Insurance companies are the most highly regulated companies on the planet since it is important to know that an insurance company has the assets to back up the policies it writes. However, no one bothered to check if CDSs, which are essentially insurance products, were backed up by anything and this is what in a nutshell caused the financial deluge of 2008. And the regulatory atmosphere during the Bush administration was that no regulation was good regulation. When subprime mortgages went belly up, the investors tried to redeem their CDSs only to find out that the institutions who had pledged to make them whole didn't have the assets to do so. This is what caused Bear Stearns to throw itself at Tim Geithner's and Ben Bernanke's feet in March of 2008 and beg for mercy. They engineered a takeover of Bear by JP Morgan Chase and to sweeten the deal they gave JP Morgan $30 billion. So they said in effect 'here take $30 billion and Bear Stearns and problem solved'. But the problem was not solved. Treasury Secretary Henry Paulson, a free market guy, was upset that Bear wasn't allowed to go bankrupt because of 'moral hazard'. He thought that banks that had gotten themselves in trouble shouldn't come begging to the government to save them. Moral hazard meant that you had to suffer the consequences of your own decisions even if that meant going bankrupt. You couldn't expect the government to bail you out. Unfortunately, this concept ended up being applied more to average citizens than to the big financial institutions.

What happened next was that Lehman, which also had a large portfolio of CDSs came crying to the government. Paulson said, "No bailout. You guys are on your own." and Lehman promptly went bankrupt. But the dominoes did not stop falling there. AIG had a humungus portfolio of CDSs with not a prayer of a chance of backing them up. The dominoes were falling and the regulators in the government had hardly a clue as to what was happening. Why didn't they know anything or have a plan for dealing with the ensuing catastrophe? Because the CDS market was a dark market. They weren't traded on an exchange. Each deal was a private deal between a party and a counterparty with no one else having a clue as to what was going on. Thus trillions of CDSs accumulated on the books of financial institutions without anyone knowing the total amount or whether or not the institutions were in a position to pay them off if need be.

Here's an example of a dark market. Say you're selling a used car. You'd like to get as much as you can for it and your counterparty would like to pay the least. You, being a used car dealer, and your counterparty being an unsophisticated rube, who do you think is going to get the better end of the deal? The dealer of course. Before the era of Kelly's Blue Book there was a dark market in used car dealing. With the advent of Kelly's Blue Book, the market is no longer dark since the counterparty can look up the value of a used car and know about what he should pay. Similarly, Wall Street traders racked up huge profits because their counterparties didn't know they were being screwed. That is why they don't want CDSs traded on an exchange or any light cast on their activities. It would cut down on the Wall Street trader's profits.

After Lehman failed, the crisis got even worse. So Geithner and Bernanke got together, much to Paulson's chagrin, and said fuck moral hazard, we have to bail out AIG to save the system, and they did to the tune of $180 billion which came as did the $30 billion for Bear Stearns from the Federal Reserve Bank. Note that this all happened during the Bush administration long before Geithner became Treasury Secretary under Obama. Who engineered the takeover of the banks by the government? Who was the big socialist here? Bush and Paulson, free market guys, not Obama. Obama wasn't even in office yet. The next thing was that Bernanke said he could not keep on doing this. Paulson would have to go to the US Congress and demand money for future bailouts, and the result of this was the TARP, the Troubled Asset Relief Program, to the tune of $700 billion. Paulson, the free market guy who believed in letting the chips fall where they may, stuffed $125 billion down the throats of the big banks whether they liked it or not. Many of them did not want to accept the money.

Later after Geithner became Treasury Secretary under Obama, he argued that investors should not have to take the least bit of a haircut. All their bets should be paid off in full. The casino's integrity would have to be preserved at any and all costs or no one would ever bet there again. Quel horreur! So what that amounted to was that if you placed a bet that Lehman was going down and you bought a naked CDS and then sure enough Lehman went down, Geithner argued that that investor should be paid in full regardless of how little he paid to place his bet in the first place or when he placed the bet! Geithner totally pussyfooted around the big banks, but of course people who were being foreclosed on got absolutely no relief whatsoever. Main Street which suffered the most from the banking crisis was left to go it alone (remember moral hazard?) while the banks were being stuffed with cash. No banker had to take a cut in salary or miss a bonus. Wall Street got bailed out. Main Street got sold out. Bankers weren't forced to write down mortgage principles or lower mortgage interest rates. Any writedowns were strictly voluntary so bankers for the most part ignored them. In the final analysis foreclosures were far more profitable. Investors could buy up foreclosed properties on the cheap paying cash and make a killing when prices went up again.

And with all the fuss over TARP, and unbeknownst to the general public, Bernanke's Federal Reserve was still stuffing the banks with cash. A lawsuit by Bloomberg News forced the Fed to reveal that it had given $7.7 trillion to banks all over the world to prevent the looming crisis. No wonder the banks recovered so quickly! This made TARP trivial by comparison. A lot of these bets that were paid in full were on naked CDSs. Anyone could buy a CDS not just a party or counterparty to the original loan, and since these markets were dark, no one knows how many insiders walked off with billions when they knew which way the wind was blowing or how little they paid to place their bets in the first place. Such a one was John Paulson, no relation to the Treasury Secretary. He made $4 billion on one bet. He had Goldman Sachs design a CDO which both he and Goldman knew would fail. Then Paulson bet against it. Goldman's traders enthusiastically talked it up to their clients, er uh, muppets who bought it. Goldman itself bet against its own product. Long story short Paulson made $4 billion which Geithner, of course, demanded that he be paid in toto - no haircut for this sleazy bastard. Now Paulson is using his billions under the Citizens United Ruling of the Supreme Court to donate millions to defeat President Obama and promote right wing policies and politicians. You can thank Tim Geithner for insisting on no haircut for Paulson. Ironically, it was Obama’s Treasury Secretary’s policies that enabled Paulson to pocket the big bucks which he is using to defeat Geithner’s boss!

So what about Blythe Masters who created the CDS when she was a young and pretty twenty something. Her career has gone onward and upward. She still works for JP Morgan Chase. She's the current head of the Global Commodities Department and resides in New York City. She takes no blame for her creation of the Credit Default Swap. She blames the parties and counterparties who made inappropriate use of it. It's their fault not hers. It's faulty execution not the fault of the product itself. She goes blithely along with her life. Masters is Board Chair of the NY Affiliate of the breast cancer charity, Susan G. Komen for the Cure, and a member of the Board of Directors of the National Dance Institute.

How hot is it? It’s so hot that all-time records are being set in June: “Nashville has reached its hottest temperature on record…109 degrees at 314 pm. The previous all time record was 107 from July 27th and 28th of 1952.”

During the June 22-to-28 period, there were 2,132 warm temperature records set or tied in the U.S., compared to 486 cold temperature records. This includes 267 monthly warm temperature records, and 54 all-time warm temperature records.

For the year-to-date, warm temperature records have been outpacing cold temperature records by about 7-to-1.

In a long-term trend that demonstrates the effects of a warming climate, daily record-high temperatures have recently been outpacing daily record-lows by an average of 2-to-1, and this imbalance is expected to grow as the climate continues to warm. According to a 2009 study, if the climate were not warming, this ratio would be expected to be even. Other studies have shown that climate change increases the odds of extreme heat events and may make them warmer and longer lasting.

All-time records set Thursday included several in Kansas, where Norton Dam recorded a high of 118°F, beating the old record of 113°F set just a few days earlier. Dodge City, Kan., set a daily high temperature record with a mark of 108°F. That came one day after that town recorded its all-time highest temperature of 112°F, breaking the old record of 110°F, which had been recorded just two days earlier, on June 26.

Since the science of attributing extreme events to global warming is still emerging, scientists still disagree to what extent a specific event like this heat wave is driven by global warming. But two of the leading experts explain at RealClimate why even small shifts in average temperature mean “the probability for ‘outlandish’ heat records increases greatly due to global warming.” Furthermore, “the more outlandish a record is, the more would we suspect that non-linear feedbacks are at play – which could increase their likelihood even more.”

Here’s a Stanford release for Climatic Change study (PDF here) I wrote about last year:

Stanford climate scientists forecast permanently hotter summers

The tropics and much of the Northern Hemisphere are likely to experience an irreversible rise in summer temperatures within the next 20 to 60 years if atmospheric greenhouse gas concentrations continue to increase….

“According to our projections, large areas of the globe are likely to warm up so quickly that, by the middle of this century, even the coolest summers will be hotter than the hottest summers of the past 50 years,” said the study’s lead author, Noah Diffenbaugh, The study, based on observations and models, finds that most major countries, including the United States, are “likely to face unprecedented climate stresses even with the relatively moderate warming expected over the next half-century.”

Bottom line: By century’s end, extreme temperatures of up to 122°F would threaten most of the central, southern, and western U.S. Even worse, Houston and Washington, DC could experience temperatures exceeding 98°F for some 60 days a year. And that’s not even the worst case, since it’s “only” based on the A2 scenario, 850 ppm.

The peak temperature analysis comes from a Geophysical Research Letters paper that focused on the annual-maximum “once-in-a-century” temperature. The key scientific point is that “the extremes rise faster than the means in a warming climate.”

The definitive NOAA-led U.S. climate impact report from 2010 warns of scorching 9 to 11°F warming over most of inland U.S. by 2090 with Kansas above 90°F some 120 days a year with 850 ppm. By 2090, it’ll be above 90°F some 120 days a year in Kansas — more than the entire summer. Much of Florida and Texas will exceed 90°F half the days of the year. These won’t be called heat waves anymore. It’ll just be the “normal” climate.

And remember, high heat means dry areas become drier and humid areas become intolerable.

On our current emissions path, we may well exceed the A2 scenario and hit A1FI, 1000 ppm (see here). In a terrific March 2010 presentation, Climate scientist Katherine Hayhoe has a figure of what the A1FI would mean:

June 29, 2012

Today a majority of the Court upheld the constitutionality of the Affordable Care Act, otherwise known as Obamacare in recognition of its importance as a key initiative of the Obama administration. The big surprise, for many, was the vote by the Chief Justice of the Court, John Roberts, to join with the Court’s four liberals.

Roberts’ decision is not without precedent. Seventy-five years ago, another Justice Roberts – no relation to the current Chief Justice – made a similar switch. Justice Owen Roberts had voted with the Court’s conservative majority in a host of 5-4 decisions invalidating New Deal legislation, but in March of 1937 he suddenly switched sides and began joining with the Court’s four liberals. In popular lore, Roberts’ switch saved the Court – not only from Franklin D. Roosevelt’s threat to pack it with justices more amenable to the New Deal but, more importantly, from the public’s increasing perception of the Court as a partisan, political branch of government.

Chief Justice John Roberts isn’t related to his namesake but the current Roberts’ move today marks a close parallel. By joining with the Court’s four liberals who have been in the minority in many important cases – including the 2010 decision, Citizen’s United vs. Federal Election Commission, which struck down constraints on corporate political spending as being in violation of the Constitution’s First Amendment guaranteeing freedom of speech – the current Justice Roberts may have, like his earlier namesake, saved the Court from a growing reputation for political partisanship.

As Alexander Hamilton pointed out when the Constitution was being written, the Supreme Court is the “least dangerous branch” of government because it has neither the purse (it can’t enforce its rulings by threatening to withhold public money) nor the sword (it has no police or military to back up its decisions). It has only the trust and confidence of average citizens. If it is viewed as politically partisan, that trust is in jeopardy. As Chief Justice, Roberts has a particular responsibility to maintain and enhance that trust.

Nothing else explains John Roberts’ switch – certainly not the convoluted constitutional logic he used to arrive at his decision. On the most critical issue in the case – whether the so-called “individual mandate” requiring almost all Americans to purchase health insurance was a constitutionally-permissible extension of federal power under the Commerce Clause of the Constitution – Roberts agreed with his conservative brethren that it was not.

Roberts nonetheless upheld the law because, he reasoned, the penalty to be collected by the government for non-compliance with the law is the equivalent of a tax – and the federal government has the power to tax. By this bizarre logic, the federal government can pass all sorts of unconstitutional laws – requiring people to sell themselves into slavery, for example – as long as the penalty for failing to do so is considered to be a tax.

Regardless of the fragility of Roberts’ logic, the Court’s majority has given a huge victory to the Obama administration and, arguably, the American people. The Affordable Care Act is still flawed – it doesn’t do nearly enough to control increases in healthcare costs that already constitute 18 percent of America’s Gross Domestic Product, and will soar even further as the baby boomers age – but it is a milestone. And like many other pieces of important legislation before it – Social Security, Medicare, Civil Rights and Voting Rights – it will be improved upon. Every Democratic president since Franklin D. Roosevelt has sought universal health care, to no avail.

But over the next four months the Act will be a political football. Mitt Romney, the Republican presidential candidate, has vowed to repeal the law as soon as he is elected (an odd promise in that no president can change or repeal a law without a majority of the House of Representatives and sixty Senators). Romney reiterated that vow this morning, after the Supreme Court announced its decision. His campaign, and so-called independent groups that have been collecting tens of millions of dollars from Romney supporters (and Obama haters), have already launched advertising campaigns condemning the Act.

Unfortunately for President Obama – and for Chief Justice Roberts, to the extent his aim in joining with the Court’s four liberals was to reduce the public appearance of the Court’s political partisanship – the four conservatives on the Court, all appointed by Republican presidents, were fiercely united in their view that the entire Act is unconstitutional. Their view will surely become part of the Romney campaign

Predictions are always hazardous when it comes to the economy, the weather, and the Supreme Court. I won’t get near the first two right now, but I’ll hazard a guess on what the Court is likely to decide tomorrow: It will uphold the constitutionality of the Affordable Care Act (Obamacare) by a vote of 6 to 3.

Three reasons for my confidence:

First, Chief Justice John Roberts is — or should be — concerned about the steadily-declining standing of the Court in the public’s mind, along with the growing perception that the justices decide according to partisan politics rather than according to legal principle. The 5-4 decision in Citizen’s United, for example, looked to all the world like a political rather than a legal outcome, with all five Republican appointees finding that restrictions on independent corporate expenditures violate the First Amendment, and all four Democratic appointees finding that such restrictions are reasonably necessary to avoid corruption or the appearance of corruption. Or consider the Court’s notorious decision in Bush v. Gore.

The Supreme Court can’t afford to lose public trust. It has no ability to impose its will on the other two branches of government: As Alexander Hamilton once noted, the Court has neither the purse (it can’t threaten to withhold funding from the other branches) or the sword (it can’t threaten police or military action). It has only the public’s trust in the Court’s own integrity and the logic of its decisions — both of which the public is now doubting, according to polls. As Chief Justice, Roberts has a particular responsibility to regain the public’s trust. Another 5-4 decision overturning a piece of legislation as important as Obamacare would further erode that trust.

It doesn’t matter that a significant portion of the public may not like Obamacare. The issue here is the role and institutional integrity of the Supreme Court, not the popularity of a particular piece of legislation. Indeed, what better way to show the Court’s impartiality than to affirm the constitutionality of legislation that may be unpopular but is within the authority of the other two branches to enact?

Second, Roberts can draw on a decision by a Republican-appointed and highly-respected conservative jurist, Judge Laurence Silberman, who found Obamacare to be constitutional when the issue came to the U.S. Court of Appeals for the D.C. Circuit. The judge’s logic was lucid and impeccable — so much so that Roberts will try to lure Justice Anthony Kennedy with it, to join Roberts and the four liberal justices, so that rather than another 5-4 split (this time on the side of the Democrats), the vote will be 6 to 3.

Third and finally, Roberts (and Kennedy) can find adequate Supreme Court precedent for the view that the Commerce Clause of the Constitution gives Congress and the President the power to regulate health care — given that heath-care coverage (or lack of coverage) in one state so obviously affects other states; that the market for health insurance is already national in many respects; and that other national laws governing insurance (Social Security and Medicare, for example) require virtually everyone to pay (in these cases, through mandatory contributions to the Social Security and Medicare trust funds).

June 26, 2012

Recently I publicly debated a regressive Republican who said Arizona and every other state should use whatever means necessary to keep out illegal immigrants. He also wants English to be spoken in every classroom in the nation, and the pledge of allegiance recited every morning. “We have to preserve and protect America,” he said. “That’s the meaning of patriotism.”

To my debating partner and other regressives, patriotism is about securing the nation from outsiders eager to overrun us. That’s why they also want to restore every dollar of the $500 billion in defense cuts scheduled to start in January.

Yet many of these same regressives have no interest in preserving or protecting our system of government. To the contrary, they show every sign of wanting to be rid of it.

In fact, regressives in Congress have substituted partisanship for patriotism, placing party loyalty above loyalty to America.

The GOP’s highest-ranking member of Congress has said his “number one aim” is to unseat President Obama. For more than three years congressional Republicans have marched in lockstep, determined to do just that. They have brooked no compromise.

They couldn’t care less if they mangle our government in pursuit of their partisan aims. Senate Republicans have used the filibuster more frequently in this Congress than in any congress in history.

House Republicans have been willing to shut down the government and even risk the full faith and credit of the United States in order to get their way.

Regressives on the Supreme Court have opened the floodgates to unlimited money from billionaires and corporations overwhelming our democracy, on the bizarre theory that money is speech under the First Amendment and corporations are people.

Regressive Republicans in Congress won’t even support legislation requiring the sources of this money-gusher be disclosed.

They’ve even signed a pledge – not of allegiance to the United States, but of allegiance to Grover Norquist, who has never been elected by anyone. Norquist’s “no-tax” pledge is interpreted only by Norquist, who says closing a tax loophole is tantamount to raising taxes and therefore violates the pledge.

True patriots don’t hate the government of the United States. They’re proud of it. Generations of Americans have risked their lives to preserve it. They may not like everything it does, and they justifiably worry when special interests gain too much power over it. But true patriots work to improve the U.S. government, not destroy it.

But regressive Republicans loathe the government – and are doing everything they can to paralyze it, starve it, and make the public so cynical about it that it’s no longer capable of doing much of anything. Tea Partiers are out to gut it entirely. Norquist says he wants to shrink it down to a size it can be “drowned in a bathtub.”

So when regressives talk about “preserving and protecting” the nation, be warned: They mean securing our borders, not securing our society. Within those borders, each of us is on our own. They don’t want a government that actively works for all our citizens.

Their patriotism is not about coming together for the common good. It is about excluding outsiders who they see as our common adversaries.

June 19, 2012

We are witnessing an epochal shift in our socio-political world. We are de-evolving, hurtling headlong into a past that was defined by serfs and lords; by necromancy and superstition; by policies based on fiat, not facts.

Much of what has made the modern world in general, and the United States in particular, a free and prosperous society comes directly from insights that arose during the Enlightenment.

Too bad we’re chucking it all out and returning to the Dark Ages.

Literally.

Two main things distinguished the post Enlightenment world from the pre Enlightenment Dark Ages.

First, Francis Bacon’s Novo Organum Scientiarum (The New Instrument of Science) introduced a new way of understanding the world, in which empiricism, facts and … well … reality … defined what was real. It essentially outlined the scientific method: observation and data collection, formulation of hypotheses, experiments designed to test hypotheses and elevation of these hypotheses to theories when data consistently supported them. It was and is a system based on skepticism, and a relentless and methodical search for truth.

It brought us advances and untold wealth and health. From one-horse carts to automobiles to airplanes. From leaches and phrenology to penicillin and monoclonal antibodies.

Until recently.

Now, we seek to operate by revealed truths, not reality. Decrees from on high – often issued by an unholy alliance of religious fundamentalists, self-interested corporations, and greedy fat cats – are offered up as reality by rightwing politicians.

For example, North Carolina law-makers recently passed legislation against sea level rise. A day later, the Virginia legislature required that references to global warming, climate change and sea level risebe excised from a proposed study on sea level rise. Last year, the Texas Department of Environmental Quality, which had commissioned a study on Galveston Bay, cut all references to sea level rise – the main point of the study.

The litany of ignorance goes on and on. Teach Creationism. Teach the “controversy” on climate science and intelligent design. Declare deregulation – which was a primary cause of the 2008 economic collapse – to be the solution to it. Preach trickle down economics, even after it has failed every time it’s been adopted; even as we watch wealth rocket up the income brackets.

What’s next? Give the flat-earthers a say. Oh hell, why stop there. Let’s put Earth back in the center of the solar system where it belongs.

We don’t need no stinkin’ science. We don’t need no pesky reality. We just gotta pass a few laws and declare things to be the way we want them to be, facts be damned. You know, keep your government hands off my Medicare.

Second, the Enlightenment laid the groundwork for our form of government. The Social Contract is the intellectual basis of all modern democratic republics, including ours. John Locke and others argued that governments derived their authority from the governed, not from divine right. Governments could be legitimate, then, only with the consent of the governed.

Jefferson acknowledged Locke’s influence on the Declaration of Independence and his ideas are evident in the Constitution.

Here again, our founders used reason, empiricism and academic scholarship to cobble together one of the most enduring and influential documents in human history. For all its flaws, it has steered us steadily toward a more perfect union.

Until recently.

Now, reason, empiricism and scholarship are the punch line to right wing jokes and jihads. Santorum captured the Tea Party’s hostility to these Enlightenment virtues when he likened a college education to an indoctrination. Thankfully, Santorum is gone, but the embrace of ignorance he advocated lives on.

And so corporations are now accorded the rights of citizenship. Power, once again, is meted out by birthright, not inalienable right. By possession of wealth, not by justice or equity or merit.

We are, indeed, at an epochal threshold. We can continue to discard the Enlightenment values which enabled both an untold increase in material wealth and a system of government which turned serfs into citizens. A system which – for all its flaws – often managed to protect the rights of the many, against the predatory power of the few.

Or we can continue our abject surrender to myths, magical thinking, and self-delusion and the Medieval nation-state those forces are resurrecting.

Republicans and Tea Partiers may be leading this retreat from reason, but they are unopposed by Democrats or the Press.

And in the end, there is a special place in Hell for those who allow evil to prosper by doing nothing.

John Atcheson is author of the novel, A Being Darkly Wise, an eco-thriller and Book One of a Trilogy centered on global warming. His writing has appeared in The New York Times, the Washington Post, the Baltimore Sun, the San Jose Mercury News and other major newspapers. Atcheson’s book reviews are featured on Climateprogess.org.

Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. Some of the accusations are true, some are false — but all of them are beside the point. Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe.

No, the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply — perhaps fatally — flawed monetary system, then compounded the problems of that system by substituting moralizing for analysis. And the solution to the crisis, if there is one, will have to come from the same places.

So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well.

So how did Greece get into so much trouble? Blame the euro.

Fifteen years ago Greece was no paradise, but it wasn’t in crisis either. Unemployment was high but not catastrophic, and the nation more or less paid its way on world markets, earning enough from exports, tourism, shipping and other sources to more or less pay for its imports.

Then Greece joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive. To be sure, the Greeks squandered much if not most of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble.

And then the bubble burst, at which point the fundamental flaws in the whole euro system became all too apparent.

Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.

So Greece, although not without sin, is mainly in trouble thanks to the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government. And these same officials have made the situation even worse by insisting, in the teeth of the evidence, that all the currency’s troubles were caused by irresponsible behavior on the part of those Southern Europeans, and that everything would work out if only people were willing to suffer some more.

Which brings us to Sunday’s Greek election, which ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway.

The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris.

Wall Street recruits young, just out of college computer science majors and mathematicians to become "quants" whose skills are used among other things to predict when pension funds are going to make huge trades so that Wall Street can jump in ahead of them and do deals effectively raising the price the pension fund must pay or lowering the profit they might make. One such young twenty something quant was Alexis Goldstein. Goldstein devised trading software for Deutsche Bank and Merrill Lynch. She has divulged some of Wall Street's most closely held cultural secrets such as the phrase "rip the client's face off" which means selling some derivative "solution" to a naive client such as a convent of nuns in Europe at a huge profit to the trader and to Wall Street while convincing the client that it's the best deal they ever made. Sometimes they refer to these clients as "muppets." JP Morgan Chase and Goldman Sachs fanned out all over Europe in the wake of the Commodities Futures Modernization Act of 2000 which legalized derivatives. The legalization of derivatives made it possible to design financial products which shifted the risks and rewards around among different clients, some seeking higher rewards at higher risk and some seeking safety with lower returns and lower risk. Derivatives could be custom designed on the trading floor taking each client's "needs" into account.

Wall Street investment bankers sold derivatives to municipalities, hospitals, convents, school districts and other institutions mainly dealing with unsophisticated people who had no idea of what they were purchasing or what could be the ultimate denouement. They believed the "F9 monkeys" from Wall Street who were nothing more than salesmen making huge commissions by selling junk to unsuspecting rubes. F9 monkeys put in a couple of inputs on their computer and then hit F9. That priced the derivatives for them and then they hit the road. Star traders could make $10-$15 million a year, a heady sum for a young twenty something.

One of the highly touted products was an interest rate swap. The town of Casino near Rome was looking to reduce the 5% interest rate it was paying on its outstanding debt. No problem. An interest rate swap could reduce the interest rate on its debt to say 2%. Little did the town fathers realize that this meant taking on more risk. They swapped from fixed rate to variable rate, from high interest to low interest and back and forth. Some counterparty would always take the other side of the bet. If Casino wanted a lower interest rate with concomitant higher risk, there was always some one or some institution that wanted lower risk and was willing to pay a higher interest rate. All went well for a while until the interest rate Casino's swap was pegged to started to go up. They paid hundreds of thousands more in interest than they bargained for. Casino ended up paying Bear Stearns (now owned by JP Morgan Chase) over a million dollars in interest. They sued and recovered half a million but they are still in the red More than a thousand municipalities and institutions in Europe bought some type of derivative from Wall Street. Potential losses are estimated to be in the billions. Scores of lawsuits have been filed.

Europe's financial troubles largely originated with the machinations of Wall Street. When countries were trying to join the euro club, they let Goldman Sachs and JP Morgan Chase devise policies of regulatory arbitrage. Regulatory arbitrage refers to using derivatives to fashion ways of getting around the spirit of the law which are still legal. Derivative solutions were a magic formula that made European countries' shaky finances still qualify for entry to the euro zone. The French cooked their books by reclassifying pension obligations. Germany played some tricks with gold. Now the chickens are coming home to roost with the collapse of the euro zone. The problem was letting Goldman Sachs and JP Morgan Chase use regulatory arbitrage to get them into the euro zone in the first place and set them on a debt based course where, no matter what they do, they will still be little more than serfs and vassals indebted to Wall Street in perpetuity.

And it wasn't just in Europe. Birmingham, Alabama, county seat of Jefferson County, had squandered $2 billion on a sewer system in 1996. Many constituents ended up with a sewer system to nowhere and huge monthly bills. County officials were looking to refinance their loan and borrow more money to complete the system without raising rates. In 2002 a former TV personality turned politician, Larry Langford, took charge of Birmingham's finances They wanted to refinance their sewer debt by borrowing another $3 billion.This was no problem for derivatives trader, Charles LeCroy, leading producer at JP Morgan, who devised a "solution" consisting of a series of interest rate swaps. Langford consulted a friend, Birmingham financial adviser Bill Blunt, who said it was a good deal. However, far from solving Jefferson County's financial problems, the intervention of JP Morgan Chase only added to them. In 2008 there was a big change in the markets. The county suddenly owed hundreds of millions of dollars in fees and penalties to its debt holders including JP Morgan. And there was another complication. LeCroy had paid Bill Blunt $3 million in bribes according to Federal prosecutors, and Blunt had given money to Larry Langford. In 2010 Langford went to jail for fifteen years on charges of bribery and fraud. JP Morgan was fined $25 million by the SEC and was ordered to forgive Jefferson County $697 million. Blunt cooperated with Federal prosecutors and got a 4 1/2 year sentence. LeCroy got 3 months. In 2011 Jefferson County filed the largest municipal bankruptcy in American history. Over 100 schools and hospitals as well as state and municipal governments bought swaps. In the last 5 years interest rate swaps have cost American taxpayers $20 billion.

Alexis Goldstein recounted how they talk about "FU money" on Wall St. That was when you had so much money that you could say "Fuck You" to anybody and not have there be any consequences. You are above everything and are immune from the world.

At one point in my career, I was being recruited by a hedge fund. During the recruitment process, one of my interviewers frankly described the fund’s founder—his boss’s boss—as a “spoiled brat billionaire.” My interviewer related a story about a meeting between the hedge fund and an executive at a company the fund wanted to work with. At one point, the visiting executive made statements the fund founder didn’t like. The founder turned to the visitor and said, “So, you came here just to try and fuck me over?” The visitor quickly stormed out in a rage. But the founder wasn’t satisfied just yet. He followed the man out of the room, into the elevator, shouted the entire ride down, and then yelled at him in the lobby until he finally left the building. When the founder came back upstairs to greet his shaken employees, he said, invigorated and beaming, “Wasn’t that fun?!”

This is Wall Street’s equivalent of the American Dream: to earn enough money so that you can behave in a way that makes the very existence of other people irrelevant.

She talks about a culture of admiring cheaters. If you do something against regulations and you only get caught once and pay a fine, it's worth it because the end goal is to make money. Wall Street exemplifies an ethic of profits at any cost. Finally, Goldstein said to herself, "I dont know if I can stay here and still be an ethical person." So the ones who end up remaining on Wall Street are the ones who have the least ethical scruples, the ones like the Enron traders of a decade ago who don't mind screwing Grandma out of her pension.

Many young Wall Street quants and traders who can't take the ridiculous long hours and have moral qualms about ripping their clients' faces off and legally gouging pension funds leave Wall Street after a short sojourn there. Alexis Goldstein now has her own consulting company. She started out teaching Occupy Wall Street about the Glass-Steagall Act, the depression era act that separated commercial from investment banking. That act was dismantled by the Gramm-Leach-Bliley Act of 1999 signed by President Bill Clinton. This made it possible for the combination of investment banks with insurance companies and commercial banks paving the way for collateralized debt obligations, credit default swaps and other sophisticated financial products.

I'll give Alexis the final word:

"It is hard to contrast the joy of community I feel at Occupy Wall Street with the isolation I felt on Wall Street. It’s hard because I cannot think of two more disparate cultures. Wall Street believes in, and practices, a culture of scarcity. This breeds hoarding, distrust, and competition. As near as I can tell, Occupy Wall Street believes in plenty. This breeds sharing, trust, and cooperation. On Wall Street, everyone was my competitor. They’d help me only if it helped them. At Occupy Wall Street, I am offered food, warmth, and support, because it’s the right thing to do, and because joy breeds joy.

I was privileged enough to make it in the door on Wall Street, and to get bonuses during my time there. But I never felt as fortunate, or joyful, as I did the night after the eviction of Occupy Wall Street from Liberty Square, when we had our first post-raid General Assembly. When the thousands of supporters who filled the park necessitated three waves of the people’s mic. When our voices together echoed not just down the park, but up into the sky as the buildings caused the sound to ricochet off their glass walls.

And so I say to my friends who still dwell behind the Wall: come join us. The spoils of money can never match the joys of community. When you’re ready, we’ll be here."

The Commodity Futures Trading Commission, the main regular of derivatives (bets on bets), wants to extend Dodd-Frank regulations to the foreign branches and subsidiaries of Wall Street banks.

Horror of horrors, say the banks.

“If JPMorgan overseas operates under different rules than our foreign competitors,” warned Jamie Dimon, chair and CEO of JP Morgan, Wall Street would lose financial business to the banks of nations with fewer regulations, allowing “Deutsche Bank to make the better deal.”

This is the same Jamie Dimon who chose London as the place to make highly-risky swaps trades that have lost the firm upwards of $2 billion so far – and could leave American taxpayers holding the bag if JPMorgan’s exposure to tottering European banks gets much worse.

Dimon’s foreign affair is itself proof that unless the overseas operations of Wall Street banks are covered by U.S. regulations, giant banks like JPMorgan will just move more of their betting abroad – hiding their wildly-risky bets overseas so U.S. regulators can’t control them. Even now no one knows how badly JPMorgan or any other Wall Street bank will be shaken if major banks in Spain or elsewhere in Europe go down.

Call it the Dimon loophole.

This is the same Jamie Dimon, by the way, who at a financial conference a year ago told Fed chief Ben Bernanke there was no longer any reason to crack down on Wall Street. “Most of the bad actors are gone,” he said. “[O]ff-balance-sheet businesses are virtually obliterated, … money market funds are far more transparent” and “most very exotic derivatives are gone.”

One advantage of being a huge Wall Street bank is you get bailed out by the federal government when you make dumb bets. Another is you can choose where around the world to make the dumb bets, thereby dodging U.S. regulations. It’s a win-win.

Wall Street would like to keep it that way.

For two years now, squadrons of Wall Street lawyers and lobbyists have been pressing the Treasury, Comptroller of the Currency, Commodity Futures Trading Commission, SEC, and the Fed to go easier on the Street for fear that if regulations are too tight, the big banks will be less competitive internationally.

Translated: They’ll move more of their business to London and Frankfurt, where regulations are looser.

Meanwhile, the Street has been warning Europeans that if their financial regulations are too tight, the big banks will move more of their business to the US, where regulations will (they hope) be looser.

After the Basel Committee on Banking Supervision (a global financial regulatory oversight body) came up with a new set of rules to toughen bank capital and liquidity requirements, European officials threatened to get even tougher. They approved a new system of European regulatory bodies with added powers to ban certain financial products or activities in times of market stress.

This prompted Lloyd Blankfein, CEO of Goldman Sachs, to issue — in the words of the Financial Times — “a clear warning that the bank could shift its operations around the world if the regulatory crackdown becomes too tough.”

Blankfein told a European financial conference that while Europe remains of vital importance to Goldman, with less than half of the bank’s business now generated in the U.S., the introduction of “mismatched regulation” across different regions (that is, tougher regulations in Europe than in the U.S.) would tempt banks to search out the cheapest and least intrusive jurisdiction in which to operate.

“Operations can be moved globally and capital can be accessed globally,” he warned.

Someone should remind Dimon and Blankfein that a few years ago they and their colleagues on the Street almost eviscerated the American economy, and that of much of the rest of the world. The Street’s antics required a giant taxpayer-funded bailout. Most Americans are still living with the results, as are millions of Europeans.

Wall Street can’t have it both ways – too big to fail, and also able to make wild bets anywhere around the world.

If Wall Street banks demand a free rein overseas, the least we should demand is they be broken up here

June 12, 2012

I was on CNBC Tuesday when Bill Clinton gave an interview saying that, given the deadlock between Republicans and Democrats on Capitol Hill, it seemed likely the Bush tax cuts would be extended in 2013 along with all spending. When asked to comment, I said Clinton was probably correct. But, of course, Republicans have twisted Clinton’s words into a pretzel. They say the former president came out in favor of extending the Bush tax cuts to the wealthy – in sharp contrast to President Obama’s position that they should not be. It’s typical election-year politics, except for the fact that the Republican megaphone is larger this time around due to all the Super PAC and secret “social welfare” organization bribes, er, donations that are filling Republican coffers. Here’s the truth. America has a huge budget deficit hanging over our heads. If the rich don’t pay their fair share, the rest of us have to pay higher taxes — or do without vital public services like Medicare, Medicaid, Pell grants, food stamps, child nutrition, federal aid to education, and more. Republicans say we shouldn’t raise taxes on the rich when the economy is still in the dumps. This is a variation on their old discredited trickle-down economic theories. The fact is, the rich already spend as much as they’re going to spend. Raising their taxes a bit won’t deter them from buying, and therefore won’t hurt the economy. In reality, Romney and the GOP are pushing an agenda that has nothing whatever to do with reducing the budget deficit. If they were serious about deficit reduction they wouldn’t demand tax cuts for the very wealthy. We should have learned by now. The Bush tax cuts of 2001 and 2003 were supposed to be temporary. Even so, they blew a huge hole in the budget deficit. Millionaires received a tax cut that’s averaged $123,000 a year, while the median-wage worker’s tax cut has amounted to no more than a few hundreds dollars a year. Bush promised the tax cuts would more than pay for themselves in terms of their alleged positive impact on the economy. The record shows they didn’t. Job growth after the Bush tax cuts was a fraction of the growth under Bill Clinton – even before the economy crashed in late 2008. And the median wage dropped, adjusted for inflation. Let’s be clear. Romney and the Republicans are pushing a reverse-Robin Hood plan that takes from the middle class and the poor while rewarding the rich. According to the nonpartisan Tax Policy Center, Romney’s tax plan would boost the incomes of people earning more than $1 million a year by an average of $295,874 annually. Meanwhile, according to the Center on Budget and Policy Priorities, Romney’s plan would throw ten million low-income people off the benefits rolls for food stamps or cut benefits by thousands of dollars a year, or both. “These cuts would primarily affect very low-income families with children, seniors and people with disabilities,” the Center concludes. The rich have to pay their fair share. Period. Take a look at this video, in which I provide the three key reasons. (And pass it on.)

June 09, 2012

I have never heard so many conservative pundits offering gratuitous avuncular advice to Barack Obama that his campaign strategy attacking Bain Capital will not get him anywhere. Joe Scarborough of Morning Joe on msnbc and others have gone on and on about how using Bain Capital against Mitt Romney is not a good strategy. Well, when conservatives offer advice to Barack Obama about what will or will not work for him, Obama better do just the opposite of what they recommend because ultimately they want him to lose. Therefore, he should double down, not abandon, the Bain Capital strategy.

But the problem with Obama is that he starts out praising Romney for being a good businessman (Clinton said he was "superlative"), certainly something no Republican would do for Obama. Then Obama goes on to say that, while Romney created wealth for himself and his investors, the President of the US must be concerned about creating jobs for everyone. This is a roundabout, circuitous route to putting Romney down, a circumlocution, something the Republicans would never do. Instead, they start right our calling Obama a failure. Obama starts out praising Romney, then seeming to walk on eggshells aiming at a scholarly criticism of his activities at Bain. Obama should get right to the point: Romney made his money at Bain by destroying jobs and companies, picking over their bones like the vulture he is.

Bain Capital is a private equity (formerly known as leveraged buyout) firm. They changed the name to protect the guilty. What they do is to pick the bones of perfectly healthy companies and in many cases drive them into bankruptcy. Here's how it works: they buy a private company with borrowed money (the leverage in leveraged buyout). But they don't buy just any company. They buy one with assets they can strip. It just so happens that they usually buy companies that have a unionized work force. Why? Because a company with a unionized work force usually has a pension fund. Their goal is to get their hands on that pension fund and transfer that asset to Bain Capital. So they borrow the money to buy a company, strip the pension fund and fire all the unionized workers. Then they hire a nonunionized work force to do the same jobs at half the pay. In this way they claim to have made the company "more efficient." Contrary to Republican hogwash, wealthy Individuals like Romney are job destroyers not job creators. Then the vulture capitalists borrow as much money as they can using the company itself as collateral. The next thing they do is to pay Mitt Romney himself, his partners and investors all the borrowed money plus the pension fund. They may also sell off parts of the company or move jobs overseas. Then the company is left to sink or swim on its own. If it can manage to pay all the increased debt Bain Capital put it in, it swims. If not, it sinks and goes bankrupt. In either case, Mitt Romney and Bain Capital have made tens or hundreds of millions of dollars.

President Obama's attack on Romney and Bain Capital has been rather tepid and timid. He essentially says that, while Romney and Bain have done wonderfully well for Bain Capital's investors making them a lot of money, that this is not the skill set required of the President of the United States who has to create jobs for the general public, not make a lot of money for investors. This is typical Barack Obama rationalizing. Instead, he should go for Romney's jugular, something the Republicans including Romney never fail to do, not congratulate him on making money for his investors. First of all, even the companies that have managed to survive the Bain treatment have ended up with a non-union work force working for minimal pay. The fact that Staples and some others are successful companies has nothing to do with it. Staples was never acquired by Bain. They just played a venture capital role there. Romney's role as a vulture capitalist was to identify companies with tangible assets and then to figure out a way to get control of those assets for Bain and its investors. But it gets worse from there.

Bain Capital had bought a controlling interest in a paper products company called Ampad for $5 million in 1992. Two years later, after Ampad bought a factory in Marion, Ind., the new management team dismissed about 200 workers, slashed salaries and benefits, and hired strikebreakers after the union called a walkout.

“We were just fired,” Randy Johnson, a former worker and union officer at the Marion plant, recalled in a telephone interview. “They came in and said, ‘You’re all fired. If you want to work for us, here’s an application.’ We had insurance until the end of the week. That was it. It was brutal.”

In October 1994, Johnson and other striking workers drove to Massachusetts to protest Romney’s Senate campaign. “We chased him everywhere,” Johnson recalled. “He took good jobs with benefits, and created low-wage, part-time, no-benefit jobs. That’s what he was creating with his investments.”

The Republicans like to point out how Solyndra, which was invested in by Obama's administration and then went bankrupt, was a huge flop. No matter how many successes the Obama administration has had, Republicans will characterize the whole program as a failure because of the failure of a small part of it. They don't mention the other successes like saving General Motors. By the same token Obama should talk about Ampad, GST Steel, Aventis and other companies whose bones have been picked by Romney and Bain and ignore any successes Romney and Bain might have had.

And let's take a look at the record specifically of Bain Capital, which Romney owned from 1992 to 2001.

• 1988: Bain put $10 million down to buy Stage Stores, and in the mid-'90s took it public, collecting $184 million from stock offerings. Stage filed for bankruptcy in 2000.• 1992: Bain bought American Pad & Paper, investing $5 million, and collected $107 million from dividends. The business filed for bankruptcy in 2000.• 1993: Bain invested $25 million when buying GS Industries, and received $58 million from dividends. GS filed for bankruptcy in 2001.• 1994: Bain put $27 million down to buy medical equipment maker Dade Behring. Dade borrowed $230 million to buy some of its shares. Dade went bankrupt in 2002.• 1997: Bain invested $41 million when buying Details, and collected at least $70 million from stock offerings. The company filed for bankruptcy in 2003.

President Obama is afraid to criticize Romney's Bain Capital days because Republicans will accuse him of being against capitalism. Well, so what. Today's capitalism is not your Grandfather's capitalism. If a law were passed making it illegal to raid a company's pension fund and make a large payout to investors, would that be against capitalism? Capitalism is malleable. It only exists within a legal framework. Some of it should be outlawed like the part that let Romney buy companies with borrowed money and then take a tax writeoff because the money was borrowed. Wall street lobbyists have changed the laws regarding capitalism to their own advantage. The Commodities Futures Modernization Act of 2000 deregulated derivatives and helped to cause the financial meltdown of 2008. Advocating reregulating derivatives is not anti-capitalistic. So if Obama were to go after Romney's record as a vulture capitalist, it does not mean he is against capitalism, only capitalism as it has been "modernized" and deregulated.

Obama should double down on what Romney and Bain Capital really did which was to load companies up with debt, take the borrowed money for their own personal benefit, raid pension funds, fire unionized workers and hire nonunionized ones at much reduced pay, sell off profitable parts of companies and then force them into bankruptcy. This is exactly what a vulture does: picks apart a carcass for its own profit. He should not give Romney one iota of credit for making money for himself and his investors. After all Romney will never be caught dead giving Obama one iota of credit for anything.

June 02, 2012

We can best honor those who have given their lives for this nation in combat by making sure our military might is proportional to what America needs.

The United States spends more on our military than do China, Russia, Britain, France, Japan, and Germany put together.

With the withdrawal of troops from Afghanistan, the cost of fighting wars is projected to drop – but the “base” defense budget (the annual cost of paying troops and buying planes, ships, and tanks – not including the costs of actually fighting wars) is scheduled to rise. The base budget is already about 25 percent higher than it was a decade ago, adjusted for inflation.

One big reason: It’s almost impossible to terminate large defense contracts. Defense contractors have cultivated sponsors on Capitol Hill and located their plants and facilities in politically important congressional districts. Lockheed Martin, Raytheon, and others have made spending on national defense into America’s biggest jobs program.

So we keep spending billions on Cold War weapons systems like nuclear attack submarines, aircraft carriers, and manned combat fighters that pump up the bottom lines of defense contractors but have nothing to do with 21st-century combat.

For example, the Pentagon says it wants to buy fewer F-35 joint strike fighter planes than had been planned – the single-engine fighter has been plagued by cost overruns and technical glitches – but the contractors and their friends on Capitol Hill promise a fight.

The absence of a budget deal on Capitol Hill is supposed to trigger an automatic across-the-board ten-year cut in the defense budget of nearly $500 billion, starting January.

But Republicans have vowed to restore the cuts. The House Republican budget cuts everything else — yet brings defense spending back up. Mitt Romney’s proposed budget does the same.

Yet even if the scheduled cuts occur, the Pentagon is still projected to spend over $2.7 trillion over the next ten years.

At the very least, hundreds of billions could be saved without jeopardizing the nation’s security by ending weapons systems designed for an age of conventional warfare. We should shrink the F-35 fleet of stealth fighters. Cut the number of deployed strategic nuclear weapons, ballistic missile submarines and intercontinental ballistic missiles. And take a cleaver to the Navy and Air Force budgets. (Most of the action is with the Army, Marines and Special Forces.)

At a time when Medicare, Medicaid, and non-defense discretionary spending (including most programs for the poor, as well as infrastructure and basic R&D) are in serious jeopardy, Obama and the Democrats should be calling for even more defense cuts.

A reasonable and rational defense budget would be a fitting memorial to those who have given their lives so we may remain free.

What if Europe and the US converged on a set of economic policies that brought out the worst in both – European fiscal austerity combined with a declining share of total income going to workers? Given political realities on both sides of the Atlantic, it is entirely possible.

So far, the US has avoided the kind of budget cuts that have pushed much of Europe into recession. Growth on this side of the pond is expected to be around 2.4 per cent this year. And jobs are recovering, albeit painfully slowly.

But a tough bout of fiscal austerity could be coming in six months. The non-partisan Congressional Budget Office warned last week that if the Bush tax cuts expire on schedule at the start of 2013, just as $100bn of budget cuts automatically take effect under the deal to raise the debt ceiling that Democrats and Republicans agreed to last August, the US will fall into recession in the first half of next year.

Even if these measures were to reduce the cumulative public debt, a recession would increase the debt as a proportion of gross domestic product – making a bad situation worse. That is the austerity trap much of Europe now finds itself in.

Meanwhile, real wages in the US continue to fall. A new “World Outlook” released by the International Monetary Fund last Friday showed that in the three years since the depths of the downturn in 2009, total national income has rebounded in most of Europe and in the US. But the share of national income going to workers has fallen sharply in the US, while rising in Europe as a whole.

The trend is even more striking measured from the start of the recession. It used to be that when a downturn began, profits fell faster than workers’ income because companies were reluctant to lay off employees and couldn’t easily cut wages given union contracts or the threat of unionization.

That is still the case in Europe, courtesy of stronger unions and labor-market regulations. But it is no longer the rule in the US. Since the start of the recession, the share of total US national income going to profits has risen even as the share going to the workforce has plunged. Profits in the US corporate sector are now at a 45-year high.

American workers have been willing to settle for lower wages in order to retain their old jobs or secure new ones. At the same time, US companies, intent on increasing profits, have more aggressively outsourced abroad, substituted contract workers and temps for full-time employees and replaced workers with computers and software.

The workforce’s share of total income includes the salaries of managers and professionals as well as the non-salary income of high-flying chief executives and financiers who receive capital gains, interest and stock compensation.

The widening gulf between the stratospheric compensation packages of the latter and most other Americans suggests why the median wage is dropping, adjusted for inflation, notwithstanding a growing economy and a jobs recovery.

The trend is all the more remarkable considering that the share of national income going to workers used to be substantially higher in the US than in Europe because Americans have to buy what most Europeans receive free – including university education and healthcare.

A dozen years ago, 64 per cent of US national income went to the labor force, according to the IMF, compared with 56 per cent in Europe. Today, however, the shares going to workers are converging – 58 per cent of national income goes to the workforce in the US and 57 per cent in Europe.

Political realities in Europe may be pushing policy makers in the same direction. Germany’s Chancellor Angela Merkel has finally started talking about spurring growth. Under increasing political pressure at home, she seems to have accepted the need to add measures promoting growth to the EU’s treaty on fiscal discipline.

But Ms Merkel and her conservative allies haven’t given up on austerity economics. She is still opposed to fostering growth through more spending, insisting that would only worsen Europe’s debt problems. Instead, she wants to spur growth with “structural reforms” – by which she presumably means giving companies more freedom to hire and fire, outsource jobs to contract workers and, in general, be less constrained by regulation.

That is of course the American model – which has been fueling corporate profits at the same time as it depresses wages.

If Europe were to move towards structural reforms that create a labor market similar to America’s while pursuing fiscal austerity, while America embraces fiscal austerity as US corporations continue to shrink payrolls, we are likely to experience the same results on both sides of the Atlantic. Real wages will decline, we will have less economic security and our public services will be diminished. That is not sustainable, economically or politically.

The White House must be telling itself there are still five months between now and Election Day, so the jobs picture could brighten. After all, we went through a similar mid-year slump in 2011 but came out fine.

But however you look at today’s jobs report, it’s a stunning reminder of how anemic the recovery has been – and how perilously close the nation is to falling into another recession.

Not only has the unemployment rate risen for the first time in almost a year, to 8.2 percent, but, more ominously, May’s payroll survey showed that employers created only 69,000 net new jobs. The Labor Department’s Bureau of Labor Statistics also revised its March and April reports downward. Only 96,000 new jobs have been created, on average, over the last three months.

Put this into perspective. Between December and February, the economy added an average of 252,000 jobs each month. To go from 252,000 to 96,000, on average, is a terrible slide. At least 125,000 jobs are needed a month merely to keep up with the growth in the working-age population available to work.

Face it: The jobs recovery has stalled.

What’s going on? Part of the problem is the rest of the world. Europe is in the throes of a debt crisis and spiraling toward recession. China and India are slowing. Developing nations such as Brazil, dependent on exports to China, are feeling the effects and they’re slowing as well. All this takes a toll on U.S. exports.

But a bigger part of the problem is right here in the United States, and it’s clearly on the demand side of the equation. Big companies are still sitting on a huge pile of cash. They won’t invest it in new jobs because American consumers aren’t buying enough to justify the risk and expense of doing so.

Yet American consumers don’t have the cash or the willingness to spend more. Not only are they worried about keeping their jobs, but their wages keep dropping. The median wage continues to slide, adjusted for inflation. Average hourly earnings in May were up 2 cents – an increase of 1.7 percent from this time last year – but that’s less than the rate of inflation. And the value of their home – their biggest asset by far – is still declining. The average workweek slipped to 34.4 hours in May.

Corporate profits are healthy largely because companies have found ways to keep payrolls down – substituting lower-paid contract workers, outsourcing abroad, using computers and new software applications. But that’s exactly the problem. In paring their payrolls, they’re paring their customers.

And we no longer have any means of making up for the shortfall in consumer demand. Federal stimulus spending is over. In fact, state and local governments continue to lay off large numbers. The government cut 13,000 jobs in May. Instead of a boost, government cuts have become a considerable drag on the rest of the economy.

Republicans will have a field day with today’s jobs report, taking it as a sign that Obama’s economic policies have failed and we need instead their brand of fiscal austerity combined with more tax cuts for the wealthy.